Endogenous Competition Strategies With R&D in a Vertically Mixed Market Under Forward Passive Ownership

This study examines endogenous choices of competition strategies in a vertically related mixed market in which an integrated public firm and a downstream firm, subject to forward passive ownership (FPO) by an input supplier, may engage in R&D investment. We demonstrate that Bertrand (price‐quantity) competition emerges when both levels of FPO and product substitutability are low (high), which proves detrimental (beneficial) to society. Compared to the case where R&D decisions are not involved, we find that the possibility that the socially desirable equilibrium (i.e., price‐quantity competition) appears becomes larger under R&D competition. Finally, when the FPO level is low but the product substitutability is high, welfare enhancement attributed to the privatization of a public firm can be more constrained under R&D investment. Our findings suggest that antitrust agencies should monitor not only the FPO level but also R&D‐engaged firms' coordination on the competition mode, while it is socially beneficial to encourage R&D investment when the FPO level is high, rather than privatizing the integrated public firm.